Accounting practices ultimately affect global economy

May 14, 2008

How much a particular hill of beans is worth may depend on who’s counting the beans. When it comes to accounting standards in the business world, every bean counts, but the quality of financial reporting differs from country to country. In a recent study, a University of Missouri researcher found that uniform and strict auditor enforcement may be more important than a country’s accounting standards, and the quality of reporting can affect the whole economy.

“To improve the quality of accounting, which improves the flow of capital to the right places in the economy and facilitates economic growth, you must have an environment that includes scrutiny by corporate regulators and independent auditors,” said Jere Francis, MU chair of accountancy in the Robert J. Trulaske, Sr. College of Business. “The auditor’s job is to be the local policeman on the beat, making sure people aren’t crossing the line. We need those cops to help good people stay good.”

According to Francis, there is a movement toward adopting International Financial Reporting Standards (IFRS). The goal of implementing the IFRS is to establish a single set of globally accepted accounting standards. The concept is rapidly gaining support by key groups such as the Securities and Exchange Commission (SEC) and the World Bank. IFRS are now used for public reporting purposes in more than 100 countries. According to financial services firm Deloitte and Touche, by 2011, almost every country, including the United States, will be using IFRS.

“On one hand, some SEC representatives think that because people are using these standards, their financial reports are going to be of good quality, but not necessarily,” Francis said. “IFRS, in principle, are a good idea but the only thing being adopted are the standards themselves. We don’t know how well those standards are being implemented; that’s a function of the auditor looking over the company’s shoulder to see if they are dotting the ‘i’s and crossing the ‘t’s.”

Francis found that, in countries that have stronger investor protection (for example, the ability of an entity like the SEC to punish misconduct), the quality of reporting is improved. The quality of accounting reports is as much a function of the auditors’ incentives to do a good job as it is the adoption of standards, according to Francis. Auditors have stronger incentives to do rigorous audits in countries like the United States where they will be more severely punished if they fail to perform at an exacting level.

According to Francis, one result of implementing global accounting standards is increased investment in global capital. Transparent and regulated financial reporting facilitates global capital flow which, in turn, yields increased confidence in the economy.

“A common accounting basis seems to simplify global economic activity, but quality is currently country specific due to poor enforcement,” Francis said. “Accounting quality is clearly on the front burner. For example, the World Bank now requires countries to show progress in order to get loans, grants and other financing from the international donor community. Countries need to commit to reforming their accounting practices and this includes the all-important incentives for the local cop on the beat, the auditor, to do a good job.”

Source: University of Missouri-Columbia

Explore further: Nimoy inspired generations of sci-fi fans

add to favorites email to friend print save as pdf

Related Stories

Obsessive audits stop charities from doing their job

Feb 17, 2015

The goal of youth-centred charities is to provide a public benefit by helping and caring for young people in a variety of ways. The public, government, and funders should do their best to support these c ...

What's the role of virtues in the lab?

Feb 03, 2015

The evolution of science and engineering in the 21st century has transformed the role of these professions in profound ways that affect research, scholarship and the practice of teaching in the university ...

TV makers design for streaming video to stay relevant

Jan 06, 2015

Does anyone just watch TV anymore? The dramatic shift toward online and mobile viewing is driving television set makers to design as much for streaming video as for watching broadcast or cable channels.

Recommended for you

Bribery 'hits 1.6 billion people a year'

Feb 27, 2015

A total of 1.6 billion people worldwide – nearly a quarter of the global population – are forced to pay bribes to gain access to everyday public services, according to a new book by academics at the Universities of Birmingham ...

How music listening programmes can be easily fooled

Feb 26, 2015

For well over two decades, researchers have sought to build music listening software that can address the deluge of music growing faster than our Spotify-spoilt appetites. From software that can tell you ...

User comments : 1

Adjust slider to filter visible comments by rank

Display comments: newest first

jburchel
not rated yet May 15, 2008
This is not really a science story is it?

Please sign in to add a comment. Registration is free, and takes less than a minute. Read more

Click here to reset your password.
Sign in to get notified via email when new comments are made.